The controller’s office in August published an audit of the account that collects tax revenue generated from both a temporary tax on annual incomes of $250,000 or more and a quarter-cent sales tax and then disperses the funds to K-12 school districts, charter schools and community college districts.

With the exception of a $59.7 million accounting error the Department of Finance made when transferring funds (but is set to be corrected in an upcoming adjustment), the program was deemed to have used and accounted for the revenue appropriately.  

Still awake? Here’s some background

The Education Protection Account was created to ensure the money is used as intended — meaning to make it so lawmakers couldn’t raid education funds for other purposes — when voters approved Prop 30 in 2012. The audit was one of several accountability provisions.

The audit noted that the $59.7 million error did not affect funding to schools because of another law (Prop 98), which guarantees a certain level of education funding. The Department of Finance told the Controller’s office the error did not hurt schools because the Prop 98 guarantee was met through other accounts.

The fact that the guarantee was met regardless of the error raises questions about the need for Prop 30. But a spokesman for the Department of Finance said Prop 30 has “provided a direct benefit to schools” since it provided additional revenue streams and increased the amount of the Prop 98 contribution.

And while $59.7 million is a lot of money, it’s only a fraction of how revenue much Prop 30 has generated. Since its inception in 2012, it’s estimated to have generated around $31.2 billion.  

Why is CalWatchdog telling me this?

In April, CalWatchdog discovered the Education Protection Account had not been audited, despite the fact that voters are set to consider a 12-year extension in November (it’s now called Prop 55, and the extension is coming two years early).

Prop 55 would only extend the income tax provision, while the sales tax provision will expire in two years.

Why audit this obscure account and not how the schools are spending the money?

Auditing this account is important because it verifies that lawmakers (or anyone else for that matter) weren’t dipping into Prop 30 funds. The audit could also catch something like a $59.7 million accounting error.

And other audits have been done. There’s actually plenty of audits of the different school districts, charter schools and community college districts located on the controller’s website.

Isn’t more education funding a good thing? Seems like a no-brainer.

The Prop 30 and Prop 55 debate has never really been about the need for more education funding. Instead, it has to do with the source of the funding. 

Many experts, including Moody’s, Standard & Poor’s and Gov. Jerry Brown’s budget, argue the state is too reliant upon income tax revenue from top earners, mainly because of its volatility.

In fact, nearly half of the state’s revenue comes from the top one percent of earners (approximately 150,000 individual tax filings). Critics of Prop 30 and Prop 55 say these measures only perpetuate the problem.

Also, Prop 30 was billed as a temporary tax. But if it Prop 55 passes, it would extend the program until 2030, which critics say is not “temporary.”

Of course, if voters down Prop 55 in November, the program will expire in 2018. There would certainly be a loss of revenue for schools (and healthcare), but Brown said he’s prepared to proceed either way.  

With California’s state budget in the best shape in years, Democratic legislators are eager to open the spending spigots. But they were cautioned at an Assembly Budget Committee hearing Jan. 15 that the good economic times could end as quickly as they began, plunging the budget back into the red.

Legislative Analyst Mac Taylor warned the committee that California’s budgetary revenue is among the most volatile in the country for fiscal year 2015-16, which begins on July 1.

As a result, he considers the $3.4 billion rainy day reserve fund in Gov. Jerry Brown’s $113 billion budget proposal to be minimal. He’d prefer a 10 percent reserve.

“You need to think in terms of having a large reserve,” Taylor said. “I appreciate the pressures that you have on you from various groups. I would hope that that [$3.4 billion reserve fund] would be sort of a floor and hope that maybe you could build on that.

“Because a downturn is coming in the near future. We don’t think it’s next year. California is growing well, but things can happen. And the more that you have the reserve, the less disruptive it is to you in making these sort of terrible short-term budget adjustments.”

That downturn is overdue, warned Keely Bosler, chief deputy director of the California Department of Finance. She noted that the country is “nine months past the average length of an expansionary period in the post-World War II era. Our economic forecast does not predict a recession, but economists rarely do. So there is a threat. The economy does continue to grow at this time, though.”

Obligations

Committee Vice Chair Melissa Melendez, R-Lake Elsinore, argued the rainy day fund should be much larger.

“The bipartisan new rainy day fund will accumulate a portion of volatile capital gains revenue so that we can use these funds during the next recession when Californians need services most,” she said. “However, it may not be enough. The governor proposes savings that amount to 2 percent reserve of all expenditures. In 2008-9 alone general revenue dropped 20 percent.”

Melendez also believes the state should prioritize taking care of its existing obligations.

“The governor has been a vocal advocate of paying down debt,” she said. “And for that we are very pleased. This budget proposes debt payments to our schools, cities and counties. Yet even under this proposal, we are concerned that we may not be eliminating enough debts and liabilities. Hundreds of billions in pensions and retirement liabilities loom, and repaying these needs to be a priority.”

There are additional constraints looming on the budget. Bosler noted state budget revenue will be taking a hit when the temporary Proposition 30 quarter-cent sales tax and “millionaire” income tax hikes begins phasing out at the end of 2016. “The budget is precariously balanced, especially over the forecast period, which is through 2018-19,” she said.

“But also over that same forecast period we are also going to be facing increased expenditures in the state’s general fund. One of the larger ones is the fact that we will be taking on a share of costs of the optional Medi-Cal expansion that was a part of the [Obamacare] health care reform. And those costs will be a billion dollars by the end of the forecast period.”

More than 12 million Californians, nearly a third of the state’s population, are projected to be receiving Medi-Cal benefits in the coming year, Bosler said. “Also, we’re seeing increased costs in that program, mainly related to administrative actions taken by the federal government.”

The state plans to spend an additional half-billion dollars in the coming year to fight wildfires caused by the ongoing drought, she said. And hundreds of millions more will be spent on entitlement programs for illegal immigrants granted federal amnesty – a cost that has not been built into the budget.

“Even though the budget is balanced and we do have the rainy day fund, there do continue to be other risks to the budget that we remain concerned about,” said Bosler.

Prop. 98

Taylor told the committee that much of the extra revenue in this year’s budget has already been slated for K-12 schools in order to comply with the Proposition 98 spending mandate. “They have brought up their revenue estimates by roughly $2.5 billion – almost all of it goes to schools,” he said.

“For some [legislative] members and a lot of people out there in the public, they have a hard time understanding how that can be. ‘How come there’s no money available for other priorities in the budget?’ You’re going to have to explain to your advocacy groups and constituents why is it that you can have funding going up by $4 billion and none of it’s available for non-98 purposes.”

Taylor warned this year’s budgetary boom could actually lead to a bust in future years.

“If we have this kind of revenue surge, you’re going to permanently increase your [Prop.] 98 obligations,” he said. “If it’s a temporary surge and your capital gains and other revenues fall down to lower levels in subsequent years, you could actually be worse off in your 98 budget. Because you would be committed to higher 98 spending and won’t have monies left over, and may actually have to take a hit to your non-98 portion of your budget.”

More spending

Despite the cautionary advice, most of the committee Democrats argued for spending more money on expanding social-service programs. They were led by Committee Chair Shirley Weber, D-San Diego.

“This state still suffers from a high level of poverty,” she said. “California has the highest rate of poverty of any of the states in the nation. We have thousands of underemployed and unemployed Californians who should be contributing to our economy today. And we have thousands of children who are home who should probably be in early child development programs for learning. This is an unfunded poverty liability.

“Last year’s budget demonstrated the fact that we do have the capacity to do some of those things to address some of the poverty issues in this country and begin rebuilding California in a stronger and more thoughtful way.”

She was seconded by Assemblyman Kevin McCarty, D-Sacramento, who said, “I know there’s a lot of angst that not enough was done in this budget to reinvest in critical programs in California.” He argued for more funding for early childhood education, noting that only 4,000 slots are opening up this year in the program, despite interest from 25,000 families.

Assemblywoman Nora Campos, D-San Jose, also argued for more funding to address poverty, especially for preschool children. “Child care, child investment development – this is a priority for quite a few members in the Assembly,” she said. “When we talk about investing in K-12, there’s also a huge movement on what we are doing to invest in [ages] one-to-four to one-to-five. So that by the time they get to K[indergarten] they are ready to move forward.”

Assemblyman David Chiu, D-San Francisco, wants to provide state funding for affordable housing: “The governor mentioned that housing growth has slowed at the same time housing prices have increased significantly around the state. California is the second least affordable state in the country. Many parts of the state are in the midst of significant affordable housing crises.”

Bolser, noting that an affordable housing project in San Francisco cost $500,000 per unit, said that it would be quite expensive tackling that problem throughout the state. “This is obviously something you could put a lot of money into and would not make a very large dent in the problem,” he said.

The Assembly and Senate budget subcommittees will spend the next four months studying and revising the budget. The California Constitution requires the budget to be passed by June 15.

According to Proposition 25, which state voters passed in 2010, only a majority vote of each house of the Legislature now is needed to pass a budget, except for tax increases.

By Dave Roberts

It’s alive. Similar to a bill narrowly defeated last year, SCA 6 is by Sen. Mark DeSaulnier, D-Concord. Taxpayer advocates fear the bill could make it difficult, perhaps impossible, to cut or limit taxes through the initiative process.

But SCA 6’s wording specifies it “would prohibit an initiative measure that would result in a net increase in state or local government costs,” except for bonds, from being put before voters as an initiative. Unless “the Legislative Analyst and the Director of Finance jointly determine” the initiative provides enough revenue to pay for higher costs.

The intent of the constitutional amendment, which would need two-thirds approval in the Legislature and majority support on a statewide ballot, is to eliminate so-called “ballot-box budgeting.” That’s the practice of using initiatives to determine how General Fund revenues are spent, rather than leaving those decisions to the Legislature. The most notorious example is Proposition 98, which mandates that about 40 percent of the discretionary budget go to K-12 schools.

SCA 6 would eliminate “the things we’ve had to deal with for the last four or five years, where we’ve gotten stretched,” DeSaulnier told the Senate Elections and Constitutional Amendments Committee on March 19. “Where so much of our budget is by formula as a result of the electorate not fully understanding sometimes the implications of some of the initiatives that they approve.”

Asked Committee Chairman Lou Correa, D-Santa Ana, “Mr. DeSaulnier, can you give me an example of an initiative recently proposed or passed that this would apply to?”

That question stumped DeSaulnier, who said, “I can’t just sitting here right now.”

SCA 6 support

Paul Smith, representing the Regional Council of Rural Counties, came to DeSaulnier’s rescue. Smith cited Proposition 36 in 2000. It moved many persons convicted of drug possession “out of the criminal justice system into other programs,” Smith said. “It had a six-year funding window in the initiative. Once that six years expired, now we’re left to honor the mandate of Prop. 36 without any funding. That’s been reduced in recent years by the Legislature because of our tight fiscal measure.”

Rural counties support DeSaulnier’s bill, Smith said, because “a lot of times ballot measures appear before the voters, they are approved, [and there’s] no funding source. Entities like the state and counties may have to make up the revenue and find a way to pay for the things the voters want. Other programs get squeezed. It puts counties, others in a very difficult position.”

State Sen. Loni Hancock, D-Berkeley, cited two other initiatives that would have been reined in by SCA 6.

“The poster child for this is Proposition 49, where you took millions and millions of dollars from the General Fund for a good cause, after-school programs,” she said. That was the 2002 initiative sponsored by Arnold Schwarzenegger to gain himself statewide political exposure a year before he ran for governor.

“Who could be opposed?” continued Hancock. “Another one would be $3 billion for stem cell research,” Proposition 71 in 2004; with interest, the payback amount is $6 billion. “It could be that the people of California would have said, ‘We don’t care if we have to close schools or if college tuition goes up, we think that stem cell research is the most important thing for us to be doing.’ But I think what tends to happen is that it’s a good cause, why not, we like it, and people vote for it. But they don’t realize that in a zero sum game where it takes a two-thirds vote to get any new sources of revenue, it means that something else that they may care more deeply about is going to have to be cut.”

SCA 6 opposition

But taxpayer advocates are more concerned about SCA 6’s impact on those who seek to use initiatives to cut or limit taxes.

“In theory this is a good idea,” David Wolfe, representing the Howard Jarvis Taxpayers Association, acknowledged to the committee. “As a fiscal Republican, these measures should be able to pay for themselves. I think we all want that. In practice the way it works out, though, I think is entirely different. Let me run through the litany of concerns that we have with this bill.

“SCA 6 states that any measure that results in a ‘net increase in costs’ needs approval by DOF and the legislative analyst. My question would be, first of all, define ‘cost.’ Would tax measures like Proposition 13 be a cost to the state due to the back-filling of ‘lost revenue’? When Prop. 13 was passed in 1978, that resulted in about $6-7 billion of revenue that the state needed to backfill out of the surplus that they had to local government. So would that be a cost? We believe that it would. So … we believe that important measures to us, including Prop. 13, [Proposition] 218 and [Proposition] 26 — all measures which we supported in the past — would no longer be able to qualify for the ballot.”

Wolfe also is concerned that DeSaulnier’s bill doesn’t allow increased costs from an initiative to be offset by spending cuts elsewhere.

“If this is accurate, we would be forced into a position where we would have to oppose important public safety measures such as Three Strikes and Marsy’s Law and Jessica’s Law,” he said. “Things that we would ordinarily not take a position on, but would now have to oppose because they would include a tax increase.”

Wolfe pointed out that SCA 6 would weaken the Legislature’s power of the purse by having special interest groups, rather than legislators, determine which taxes to raise to offset the costs of their initiatives. And he cited a 2010 study by USC professor John Matsusaka that asserts that concerns about ballot box budgeting are overblown.

“Contrary to the claims of many pundits, voter initiatives have not constrained the California budget to the extent that fiscal crises are inevitable,” said Matsusaka’s study. “I reach this conclusion by examining each of the 111 successful initiatives in the state’s history. For the 2009-2010 budget cycle, voter initiatives locked in about 33 percent of spending, most of which probably would have been appropriated even if not required, and placed no significant prohibitions on the two primary sources of state revenue – income and sales taxes.”

Wolfe added, “If you remove Proposition 98, that number drops to 4 percent. I know that it’s not really feasible and practical to suspend Prop. 98, and there’s probably opposition on both sides of the aisle to that decision. But the point is, the Legislature has the ability to untie their hands from this ballot box spending. So there’s plenty of flexibility that legislators have without this measure to control spending.”

Prop. 98 also can be suspended with a two-thirds vote of the Legislature.

The California Taxpayers Association also was concerned about SCA 6. “The measure’s definition of costs would apply to tax reductions, credits, exemptions, exclusions, federal conformity and other tax changes,” the organization wrote on its website. CalTax wrote to the committee, arguing, “Although requiring a mechanism to pay for new programs is appealing, giving power to either a legislative appointee (the legislative analyst) and/or gubernatorial appointee (the director of finance) to remove an initiative from the ballot sets a dangerous precedent. It has the potential to disregard important policy measures for manipulative political purposes.”

It failed last session

SCA 6 is identical to DeSaulnier’s SCA 4, which fell three votes short of the necessary two-thirds support in the Senate on Aug. 21, 2012 after Republicans balked.

Sen. Ted Gaines, R-Rocklin, said before the vote, “I’ve got challenges to the accuracy of the information provided by LAO and the director of finance. We are looking for a non-biased opinion on these initiatives, and I’m not clear that you’re going to get that. For instance, whenever a proposal comes forward on a tax cut and how that can accelerate growth within the economy, there’s no consideration for dynamic analysis by the LAO. So I think you’re going to get a jaded perspective as to what the fiscal impacts are on initiatives.”

DeSaulnier responded, “I do hear the concerns that the analysis won’t be robust enough. But I think that’s as good as we can get. And having the LAO, a well respected group, work with the Department of Finance will put more pressure on the people who submit these initiatives to make sure that there’s a more robust financial consideration.”

In last week’s committee hearing, DeSaulnier was more conciliatory, saying that Wolfe “makes some very good arguments, so I think there’s some room for tweaking.” That tweaking may include changes to the bill’s exemption for an initiative’s costs from the issuance, sale or repayment of bonds.

With the Democrats having gained a supermajority in the Legislature, chances for passage of DeSaulnier’s bill in this legislative session have improved dramatically. It received strong support from the committee last week, passing 3-1. It’s scheduled to be considered by the Senate Appropriations Committee on April 8.

By Dave Roberts

Gov. Jerry Brown declared at the start of his State of the State address, “We have wrought in just two years a solid and enduring budget.” But in recent legislative hearings, the Legislative Analyst’s Office charged that he raided the Proposition 39 energy fund to make it look like he’s increasing general education spending. And some legislators claimed that Brown’s budget is unfairly expanding the use of the rural fire tax.

“On Proposition 39 we have some significant concerns with the governor’s proposal,” Legislative Analyst Mac Taylor told the Senate Budget Committee. “The governor’s proposal has the strange effect that it actually reduces by about $190 million the ongoing support for schools. We just think that that’s not in keeping both with what the ballot pamphlet said the way these monies would be treated or the way we’ve considered these revenues over the years.”

Prop. 39, which last Nov. 6 voters passed easily, 61 percent to 39 percent, increased taxation on multi-state corporations doing business in California. It’s projected to generate an extra $900 million in corporate taxes in the next budget year. Half of that revenue — $450 million — must be spent on energy efficiency projects in the state. In other words, those are restricted funds. They can’t be considered part of the General Fund, which can be spent for any purpose the Legislature chooses, according to the LAO.

Brown’s budget treats Prop. 39 revenue and spending as part of the General Fund, and thus subject to the Proposition 98 requirement that about 40 percent of such money be spent on K-12 education.

Not so fast, said the LAO.

“By our longstanding reading of Proposition 98, and something that we worked with counsel on, we don’t believe that the monies that are to be transferred to the energy fund should count as Proposition 98 [revenue], only the monies that the Legislature truly has control over,” said Taylor. “So we have a very different take that you would not count those monies as [Prop.] 98. Therefore you would not count the spending either.”

Brown’s budget also proposed to use all of the Prop. 39 energy efficiency spending on the schools: $400 million for K-12 and $50 million for community colleges. He’s taken a restricted energy project fund that was supposed to be used for both school- and non-school-related projects and counted all of it toward the general-education spending requirement, according to the LAO.

Poorer schools could lose out 

Making matters worse, Brown is not proposing to spend those funds where they are needed most: the schools with the oldest, most energy inefficient buildings and utilities. Instead, he wants to divvy the funds based on the number of students in each school district. As a result, a large, wealthy, suburban district with modern, state-of-the-art facilities would receive more funding for energy efficiency improvements than a smaller, poorer, urban district with antiquated equipment and drafty buildings.

That funding formula also ignores another goal of Prop. 39: to create jobs. There may be non-school projects eligible to receive money from the Clean Energy Job Creation Fund that would create more jobs than school-related projects. Perhaps a food bank in Compton or a women’s shelter in Oakland. But they would receive nothing from Brown’s budget.

“When we look at the actual plain language of the measure, Proposition 39 seems to set up a process where you have to make sure that the energy benefits and the job creation benefits are maximized,” said Taylor. “And that you have to go through a process where agencies with experience in energy-related projects allocate the funds. We’re just not sure that his proposal follows the language of [Prop.] 39.”

In a report to the committee, titled “Treatment of Proposition 39 Revenues Highly Questionable,” the LAO concluded that what Brown has done “is a serious departure from our longstanding view of how revenues are to be treated for the purposes of Proposition 98. It also is directly contrary to what the voters were told in the official voter guide as to how the revenues would be treated.”

The report made two recommendations:

* The Legislature should exclude from the Prop. 98 calculation all Prop. 39 revenues required to be used on energy-related projects. This would reduce the minimum guarantee by roughly $260 million.

* The Legislature should count the $450 million in allocations for energy efficiency projects as non-Prop. 98 expenditures (though the state still could choose to spend a portion on schools and community colleges).

The LAO report said, “Relative to the Governor’s proposal, these two recommendations combined would result in roughly $190 million in additional operational Proposition 98 support for schools and community colleges (with total state costs increasing by the same amount).”

Brown’s defense

Michael Cohen, the Department of Finance chief deputy director, defended the Brownian motions:

“It strongly is precedent-based what we are doing. The closest precedent we have is Proposition 42, which did a very similar thing in terms of transportation funding. We are treating the Proposition 39 money in the exact same way as Proposition 42 monies were dealt with for almost a decade. Basically, if money touches the General Fund, those are General Fund revenues under the Constitution. The Constitution doesn’t say, ‘Well, don’t count the General Fund revenues that are only there for a few minutes.’ The Constitution says that Proposition 98 is built upon General Fund proceeds of taxes. And that’s what we’ve done. Proposition 39 is very clear that the proceeds of the corporation tax from the change in the single-sales factor are deposited into the General Fund. If revenues are deposited into the General Fund, they are General Fund tax revenues.”

Cohen disputed the LAO’s contention that Brown’s budget shortchanges schools by $190 million. He said:

“We think our proposal is the best for education. I disagree with the characterization that schools would be better off under the LAO’s interpretation. Instead, by putting all of the money into the General Fund, as the initiative calls for, the Proposition 98 base does go up. So that is sort of a permanent benefit to schools. In addition, by providing the $450 million to schools, that is a clear benefit to them. Both by letting them fund energy efficiency projects, and also by freeing up additional budget resources to have discretionary funds by lowering their energy costs. The analyst has suggested that some of the money shouldn’t go to schools. Really, if you were to take their interpretation and divert money away from schools to other types of energy efficiency projects, then schools are going to be the loser.”

Cohen also defended doling out the energy funds on a per-pupil basis rather than directing them to schools with the greatest need for energy efficiency improvements:

“Certainly you could devise much more complicated formulas that are trying to account for various districts’ and students’ energy needs. We took a look at it. Basically, there was an argument for all sorts of different factors. Some districts are in hotter climates, some are in colder climates. Some have newer facilities, some have older facilities. Instead of accounting for all of those factors, it was much easier to quickly get the money out, create a system where local districts are responsible for finding a project that is the most cost-effective and meets the requirements of Proposition 39.”

Senators concerned

But several senators were not mollified by Cohen’s rationalizations.

“Your reference to Proposition 42 doesn’t wash,” said Roderick Wright, D-Los Angeles. “Because that money is dedicated [for transportation projects] and never went into the General Fund. We need a much more specific analysis relative to Proposition 98 in that same vein.”

Wright is also concerned that the extra revenue projected from Prop. 39 may not materialize. He said, “You’re potentially co-mingling it with the General Fund, and you’re making an allocation for money that may never occur. You could end up injuring the General Fund by spending money that never occurred as a result of the proposition. So I think there are a number of concerns that I have with the way that you characterize the fund. … I think we need some leg[islative] counsel action here. In South Central, we would say, ‘There’s something in the milk ain’t white.’”

Loni Hancock, D-Berkeley, is concerned about potentially wasting the energy funding by not focusing it where it can do the most good. “Energy efficiency is very important to consider first,” she said. “Otherwise you might be putting solar panels on a sieve.”

Concerns were also raised at the committee hearing about Brown’s proposal to place adult education programs under the purview of community colleges rather than continuing to share them with K-12 school districts. One senator pointed out that community colleges are fewer and further between than high schools, and therefore not as convenient for an adult to attend a night class.

Fire tax expansion

And Tom Berryhill, R-Stanislaus, is angry that Brown’s budget expands programs funded by the $150 rural fire tax.

“I’ve been opposed to these fees from day one,” said Berryhill. “I don’t think they were constitutionally right. As the Board of Equalization first began to send out these bills I’ve been troubled with reports I’ve received about the way the fee is being assessed and administered. In my district I’ve got a lot of timber, a lot of hills and a lot of folks this directly affects.”

Cohen responded that there are numerous items in the budget that displease legislators.

“When we say there’s a balanced budget, it’s a continuation of all of those things that I imagine many of you disagreed with many of the decisions that were made,” he said. “But collectively we’ve got balance. It’s the administration’s view that the fee is an appropriate fee. That it’s responsible for offsetting General Fund costs. Also it’s appropriate for those homeowners to pay a share of the costs of firefighting in their region.”

Berryhill responded, “You can make the argument one way or another whether or not we need to be paying a fee for our own protection. But when this thing starts to expand another $13 million, I don’t get it.”

Legislative Analyst Farra Bracht agreed, saying, “We have similar concerns about the expanded use of the fee. And we are speaking with leg[islative] counsel to get their thoughts on the legality of those uses proposed in the budget.”

The Senate Budget Committee is scheduled to review other aspects of Brown’s budget proposal on Feb. 14.

By Chris Reed

If we are going to have a debate about school finances in California because of the Legislature’s interest in making it easier for school districts to get parcel taxes approved to boost their budgets, let’s have a serious debate. A serious debate would focus on three related school finance scandals.

1) The unconstitutional practice of school districts asking parents to pay for basic educational resources.

2) The insane but apparently legal practice of school districts using 30-year borrowing to pay for shortlived electronics like laptops and for the most routine maintenance, including graffiti removal.

3) The ridiculous practice of school districts using capital appreciation bonds — which districts often don’t start paying back for decades and which can’t be refinanced. The result is bonds that can cost 10 times or more the original sum being borrowed.

How are they interrelated? Because they are all driven by standard teacher compensation practices in which most teachers get automatic raises for 15 of their first 20 years on the job and get additional raises just for taking graduate courses of any kind — not even in their teaching field.

This has led to employee compensation consuming 90 percent or more of the budget in many school districts — and to desperate attempts to find money to cover teacher pay such as 1, 2 and 3.

Isn’t this, yunno, news — this phenomenon? Not to the Sacramento media, which has covered the third scandal but never placed it in the larger context of why school finances are so stressed.

The key to understanding Sacramento is that goal no. 1 of the CTA and the CFT is preserving and funding those automatic raises, and the unions are the most powerful force in Sacramento. It would be nice if George Skelton ever mentioned this, don’t you think? But don’t hold your breath.

By Katy Grimes

SACRAMENTO — “Everything’s Coming Up Roses,” from the Broadway musical Gypsy, should be Gov. Jerry Brown’s new theme song. His 2013-14 budget proposal, released last Thursday, was full of happy news, good times a projected balanced budget and an upcoming surplus.

Clear the decks! Clear the tracks!
You’ve got nothing to do but relax.
Blow a kiss. Take a bow.
Honey, everything’s coming up roses!

Even more amazing than the governor’s rosy budget is that Legislative Analyst Mac Taylor appears to agree. Mostly.

Overview

I attended the LAO’s meeting yesterday at their Sacramento office where they presented their overview of the governor’s budget proposal. But a roomful of journalists didn’t completely buy the “everything’s coming up roses” message.

“The governor’s proposed budget reflects the significant improvement in the state’s finances that our office identified in November,” the LAO announced. “The budget roughly is in balance,” Taylor said today at the meeting.

Taylor explained that, in the LAO’s November budget projections, they recommended that “fiscal restraint” was necessary. “I think the governor’s proposal reflects that kind of discipline. He should be commended,” Taylor said.

Taylor admitted that, even with fiscal discipline, the governor did not address the state’s retirement obligation — a $500 billion unfunded pension liability. Taylor mentioned concern with the growing state teacher retirement fund.

He acknowledged that many of the reporters present had written stories questioning the gaping difference in the LAO’s projection of a $1.9 billion deficit, and Brown’s projected balanced budget  and surplus. Taylor explained that, while Brown’s administration and the LAO were still far apart in budget projections, the Department of Finance did a better job this time around bringing their lofty projections back down to earth.

Last year, Brown’s budget numbers were so far off of the LAO’s that, by the May Revise of the Budget, Brown and the Department of Finance had to drastically reduce their happy projections, and at least address the fiscal mess the state was in.

This year, Brown has erased the deficit from his budget proposal, and is projecting that, by 2015, California will enjoy a $1 billion surplus. Everything’s coming up roses.

Math is hard

According to Teen Talk Barbie, “math class is tough.”  

And the governor’s numbers don’t add up — particularly with the more than $500 billion unfunded pension debt, as tallied by a Stanford University study; and the $10 billion owed to the federal government for California’s Unemployment Insurance borrowing.

Brown’s budget proposal lists only $181.2 billing in unfunded retirement liabilities. However, State Budget Solutions‘ third annual State Debt Report demonstrated an unfunded California pension liability of $617 billion — larger even than the number in the Stanford study.

Wall of debt

According to the governor’s budget proposal, California’s “wall of debt” totaled only $34.7 billion last May, and is now down to $27.8 billion. It includes:

* Deferred payments to schools and community colleges;

* Economic Recovery Bonds;

* Loans from Special Funds;

* Unpaid costs to local governments, schools and community colleges for state mandates;

* Underfunding of Proposition 98;

* Borrowing from local government (Proposition 1A);

* Deferred Medi-Cal Costs;

* Deferral of state payroll costs from June to July;

* Deferred payments to CalPERS;

* Borrowing from transportation funds (Proposition 42).

Taylor said that the choice is paying down the debt, versus adding new revenues, but not both.

Taylor noted that the wall of debt was not included  because “we know what the numbers are.”

But any way you slice it, California owes a great deal of money and its budget cannot be balanced, or honestly look at a surplus, anytime soon.

Health and education funding

California is facing a dramatic change in health care funding in the very near future because of  Obamacare. The state will be shifting the entire Healthy Families program into Medi-Cal.

Healthy Families is low-cost insurance for children and teens. Medi-Cal is California’s health care aid for anyone receiving welfare assistance. This is not apples-to-apples by any stretch of the imagination.

Taylor acknowledged that he didn’t want to discuss this, and shifted right into education spending.

Prop. 39 and education funding

An area in which Taylor appeared to be in disagreement with Brown was over Proposition 39, the ballot initiative which passed in November, taxing out-of-state businesses with a physical presence in California.

Projected Prop. 39 revenue will go right into the General Fund as well as into spending for renewable energy. It also factors into the mandatory education spending calculation of Proposition 98. Prop. 39 is estimated to bring in $1 billion in tax revenues, but many warn that this is also a volatile revenue prediction.

Taylor said that the Prop. 39 ballot pamphlet specifically said that revenue from Prop. 39 would be spent on energy-related projects for the first five years, and then into education.

Taylor argued that the Prop. 39 revenues should not be counted toward education funding for the first five years. “But, it has short-term consequences — only five years,” he said.

Differing ‘assumptions’

Taylor said that Brown’s budget proposal “assumes a different set of assumptions.” But isn’t accounting usually done one way in this country? A different set of assumptions may work in marketing, but not in the real world where real people have to face real budget crises.

While Brown’s budget proposal is even more rosy than the LAO’s projections, the economic assumptions in the budget summary claim that there is an economic recovery, many sectors of the economy are improving, real estate conditions are better, the housing market is improving and unemployment is dropping. On Thursday, Brown never mentioned how the millions of unemployed Californians will find work, or how the economy will improve with this increase in government spending and taxing.

I don’t believe for a minute that Taylor buys into Brown’s budgets. What Taylor says publicly and what his reports say also have differing assumptions.

By Wayne Lusvardi

You probably have seen the photograph of the Casino Pier Roller Coaster on the New Jersey shore inundated by the ocean and in shambles from the impact of Hurricane Sandy.

In Sacramento, Calif. on the same day, the weather was described as a “beautiful fall day…on mostly sunny skies with highs in the middle 70’s.”   But a different type of storm — a budget cyclone — is about to hit the California capitol.

The pending California storm would send Gov. Jerry Brown’s roller coaster budget into a nosedive.  Recent opinion polls show support for Brown’s Proposition 30 tax rate increase has dropped to 48 percent.  And there are good reasons why.

The way California’s general fund budget is managed is to rely on giant upswings in unpredictable capital gains taxes every year.  Alternatively, a voter-approved tax increase is factored into budget revenue predictions if an economic recession indicates that capital gains tax revenues will be small.   Once a new higher revenue level has been established, then the budget is “balanced” high.  But the budget can be balanced low just as well as high.

This is California’s tax-and-spend roller coaster budget.  It creates artificial structural budget deficits each year that have to be met by higher and higher tax revenues. Gov. Brown already included revenues from his proposed tax hikes from Prop. 30 in this year’s budget.

How the Public School Budget Deficit is Contrived

When financial and real estate markets or voter-approved tax increases don’t deliver the projected revenues, then California declares a budget crisis.  Declaring that K-12 public school budgets would have to be cut is the way the state socially constructs and manages a budget crisis.  It is never portrayed that it is the Medi-Cal or public pension funds that are running a deficit. Public school children are used as poster children every year for any revenue shortfalls in health and welfare programs, pensions, or bond debts.

Annual public school budget deficits are a public ritual. School budget deficits are also the preferred choice of liberal policy makers, not a reflection of the stinginess of the taxpayers or conservative lawmakers. A “structural budget deficit” is always a public school budget deficit. But there is another apparent reason why the public schools are portrayed as the line item in the state budget that is running a deficit: the voter-mandated funding formula from Proposition 98 over-funds public schools.

How do we know public schools are over-funded?  Well, the California Teacher’s Association is suing the state to get paid back $3 billion that the state borrowed from the state education fund in 2004-05 to plug the general fund deficit in return for jobs protections for core teachers.  In other words, in the last seven years, public schools have lost up to $3 billion without having to lay off any core classroom teachers.

Additionally, in the past five years, total enrollment in state public schools has declined 1 percent and is projected to decline even further. But the budget formula for funding public schools is mostly based on a percentage of the state general fund budget, not on the overall attendance level.

Prop. 98 guarantees public schools about 43 percent of the state general fund budget.  What was cut out of the public school budget since 2009 is all the fluff of political earmarks — artificial jobs programs — that saved local school budgets but didn’t hurt the academic performance of the poor.

California’s General Fund budget was $102.98 billion in fiscal year 2006-2007.  Forty three percent of that for public schools was $44.2 billion.  In 2012-13, the General Fund budget is $92.55 billion, of which roughly $39.8 billion is guaranteed for public schools.  This deceivingly indicates that public schools have lost $4.4 billion in funding.

Indicated Change in Base of General Fund on School Spending

General fund

The only way for the state to manage general fund budget deficits with 43 percent of funds locked in for public schools has been to lower the base or floor of the general fund.  The apparent way the state has managed this has been to shift monies from the General Fund to Special Funds. If you can’t reform the budget beast, the only apparent alternative has been to starve it.

In the last five years, the General Fund budget revenues have decreased by $10.4 billion.  But the Special Fund budget has increased by $13.15 billion.  Many programs have been shifted into the Special Fund to make it appear the General Fund is running a shortfall in funding for schools.

Looking at the entire state budget picture, Federal Funds have increased $16.57 billion from 5 years ago.  And the total of all expenditures in the General, Special, Federal, and Bond Funds has increased $15.8 billion over the past 5 years.

Change In State Budget Levels Per Fund from 2007 to 2013

In the above table, it appears that the hole in the state budget is in the Bond Fund. This would include the liability for public pensions. Retirement benefit costs have increased from $1.4 billion in 1999 to $6.5 billion this fiscal year.

Tax cliff

As the Wall Street Journal editorial “Jerry Brown’s Tax Cliff” succinctly states it:

“The most important single vote in America next Tuesday, after the Presidential race, is Governor Brown’s attempt to stick Californians with another giant tax increase.  Mr. Brown and his labor allies say Proposition 30 will fix the state’s budget deficit and ward off education cuts.  But the real choice before voters is whether to issue Sacramento’s incorrigible spendthrifts another blank check.”

The problem is not a lack of funds, but budget management policies that intentionally shift guaranteed funds away from public schools. These funding shifts may be used not only to plug intentionally created school budget deficits, but to backfill unfunded pension liabilities or gaps in Medicaid caused by Federal Social Security Disability policies.

California’s voters are being taken on a roller coaster ride without a seat belt. They should be prepared to hold on for their life and their wallets.  The state “structural” budget deficit is not bad fate from uncontrollable market downturns, but a choice.

Voters also have a choice at the ballot box on Nov. 6.

CalWatchdog contributor Chris Reed was on “Which Way, L.A.?” on KCRW on Thursday to talk about why Propositions 30 and 38 deserve to fail.  KCRW is one of the most popular NPR stations in the nation.

Reed was in a broad discussion with journalists and some prominent defenders of the education status quo — and he got a faintly sympathetic treatment from Evan Halper of The Los Angeles Times, who requoted one of his potshots at Prop. 30.

Listen here.

By Katy Grimes

Reports of California’s debt usually just include the $17 billion budget deficit. But California also owes the federal government $14 billion, and public schools $10 billion.

While California sputters under  the massive debt, legislators continue to take up ridiculous bills and resolutions, and ignore bills which would begin necessary reforms.

Last week the Assembly voted to adopt Assembly Resolution 99 recognizing September 2012 as National Coupon Month. ACR 99 by Assemblyman Felipe Fuentes, D-Sylmar, “would acknowledge the value of coupons in achieving significant savings for California consumers.”

Legislative time has actually been spent on this baffling resolution. The Assembly Rules Committee, notorious for killing Republican bills by refusing to act on them, had a committee staff member prepare an analysis of ACR 99, and committee members voted 6-4 to pass the Resolution.

It is now in the hands of the Senate Rules Committee where it will undoubtedly go through a similar process.

While this trivial resolution sailed through the Assembly, many good-government Republican bills sit stuck in the Rules Committee, or are unceremoniously killed once they make it to the Assembly Appropriations Committee, led by Fuentes.

Good bill

Assemblyman Brian Nestande, R-Palm Desert, has re-introduced ACA 13, a constitutional amendment to give the State Controller the authority to approve the budget. “California has a natural collusion between the Governor and the Legislature,” said Nestande. “This would be like having an independent third party approve the budget, but it’s the State Controller.”

ACA 13 would prohibit the Legislature from sending to the Governor a Budget Bill in which General Fund appropriations exceeded General Fund revenues as determined by the Controller.

Nestande said he originally introduced ACA 13 in 2009, to prevent legislators from passing an unbalanced budget each year just so they can collect their full paychecks. “This measure would require the controller to review estimated revenues and expenditures, and certify that a budget passed by the Legislature is balanced before it can be signed by the governor,” Nestande said.

Nestande said that having the controller certify that the budget is balanced would force the Legislature to produce a legitimate budget, and not just call it balanced.

Interestingly, Texas has done this successfully since 1942.

Nestande said brought this system up again during session last year, but Controller John Chiang shot the idea down saying it would require more staff.

Ironically, last year the Legislature sent the governor its budget $1.85 billion out of balance. It was Chiang who pointed this out and the governor vetoed it.

Good bill stuck in committee

Nestande’s bill would also prohibit either house of the Legislature from adjourning for a recess after sending a budget to the Governor, until the Controller has provided the certification.

But ACA 13 sits in the Assembly Budget Committee with no hearing scheduled. It is highly unlikely that ACA 13 will ever see the light of day.

Nestande said that when voters passed Proposition 25 only two years ago, they thought they were voting on a measure which would require lawmakers to pass an on-time, honest budget by June 15 every year, as a condition of receiving their salaries.

But a recent Superior Court decision stated that Prop 25 actually only said that a majority of legislators could decide whether the budget they passed was balanced, in order to continue to receive their paychecks, even if that budget was bogus.

Included in Prop 25 was the “no budget, no pay” provision, added in by Democrats to convince voters to approve giving the majority party complete control over the budget process. But this sneaky provision had no teeth. There was no enforcement mechanism in Prop 25 to hold legislators accountable if they passed a phony budget, and is why the Superior Court ruled the way it did.

Nestande said that ACA 13 would provide the budget process voters thought they were approving.

California has a $17 billion deficit, owes the federal government $14 billion, and owes the California public school system $10 billion.

ACA 13 would also stop the Legislature from deferring education funding to California’s schools.

Proposition 98 was passed in 1988 requiring a minimum of 40 percent of California’s general fund spending to be spent on education. In 2001, California lawmakers started shorting education funding in order to “balance” the state budget. But the money has to be paid back, and has quickly added up to $10 billion.

ACA 13 will force the Legislature and Governor to account for state funding shortfalls honestly, so that school officials will have a better picture of the actual level of funding their schools will be receiving. Nestande said that if cuts are made to education, it should be done openly and not masked by accounting mechanisms.

By WAYNE LUSVARDI

A demogogue is a leader who obtains power by means of impassioned appeals to the emotions and prejudices of the populace. And a demographer is someone who studies the characteristics of human populations, such as size, growth, density, distribution, and vital statistics.

Thus, to coin a phrase, a  “demogogue-grapher” is someone who studies human population with his emotions and a political agenda.

Such must be the case of USC Professor of Demography Dowell Myers, interviewed by columnist and Proposition 13 hater Steve Lopez in the May 31 issue of the Los Angeles Times, “Debunking the Myth of Prop. 13”.

According to Myers, the decline in the number of families and children at the bottom of the population pyramid means that, in the future, there will be a surplus of family housing and the price will drop out of the bottom of single family residential housing.  Thus Myers asserts that Prop. 13 is “toast” because, according to him, it only works in a constantly rising real estate market.

Myers may be a competent demographer, but he is out of his league when he starts claiming that Prop. 13 is “toast” in a falling real estate market. To the contrary, Prop. 13 has “saved” California’s property tax base for public services and schools from ruination and saved politicians from political instability and being thrown out of office.  How so you say?

How Prop. 13 Really Works

Under Prop. 13, the current value of a building goes up and down as the properties are sold, not as the market goes up or down. Without Prop. 13, as the value goes up, the reassessments would drive up the costs of taxes.

For example, without Prop. 13, the state gets used to the new amount of higher taxes and pays 10 new teachers’ salaries with the money. When the market goes down, the building value goes down and the owner gets another reassessment. Tax receipts decrease, and the government no longer has the tax money to pay for 10 teachers. It can only pay for five teachers’ salaries. An artificial “shortage” of five teachers is created.

On the other hand, with Prop. 13 in effect, the current value of a building goes up by 2 percent annually in rising markets as long as the ownership does not change. The state pays for three teachers’ salaries with the money. The amount gradually increases, but is fairly constant.

When the market goes down, the building value goes down and the owner gets another reassessment. The taxes decrease and the government no longer has the tax money to pay for three teachers. It can only pay for two teachers. A “shortage” of one teacher is created. This may be much more easily handled than a five-teacher “shortage.”

The difference is this: In the first case, without Prop. 13, the state government spent the higher amount and expected it. When the market downturn came around, there was a huge deficit.

But in the second case, with Prop. 13 in effect, the government does not experience a severe shortage. This second way is the way to more stable government funding — that is, not getting rid of Prop 13 or raising taxes through the roof by a split commercial-residential property tax roll.

By and large, the California newspaper media and academia are so biased against Prop 13 that they have failed to understand this simple concept.

The Real Problem

The problem in California is not Prop. 13, but capital gains taxes on real estate, which has one of the highest tax rates in the nation. California experienced a boom in capital gains taxes from 2003 to 2007 due to the Real Estate Bubble created by unions and public pension funds trying to puff up the real estate market to plug a huge funding gap in public pensions.

Under Proposition 98, 40 percent of the state budget must go to K-14 public schools. The problem was that, during the Real Estate Bubble, the public schools hired too many temporary teachers and ancillary personnel instead of socking the money away for when the inevitable bust in the Real Estate Bubble occurred. Now the schools are claiming they suffer deep budget cuts they cannot absorb.

The reality is that public schools must adjust back to 2001 budget levels.  If anything, Prop. 98 should be reformed, not Prop. 13.

Prop. 13 “saved” California’s public schools from ruination.  Prop. 13 is not “toast.” Instead, let’s raise a toast to Prop. 13.